On Christmas Eve, in true Grinch fashion, I gave you a year-end top-five list of pet peeves, the things that make me maddest about mutual funds. Seems I touched a few buttons because many of you wrote in to add your favorites. So here's a special Tuesday edition of the column with a sampling of your reactions. I'll be back on Thursday with my regular weekly column.
ABCs of 12b-1s: You Lose
Ralph, 12b-1s get me steaming, too. As I pointed out in my 1997
list of top peeves, the rationale behind these all-too-common marketing-and-distribution fees just doesn't make much sense. The fees are supposed to be used to enable the fund to expand its asset base so the company can spread management costs across a broader base. That's the thinking, but as we know all too well, when a fund's size increases, fees rarely decrease. Plus, the logic is just plain flawed. Why do I, as a shareholder, want to pay to make my fund
, when size almost always hurts rather than helps performance? And get this: Even some
funds -- funds that
take any more shareholders -- are charging to market their funds to attract new ones. Talk about wanting to have it both ways.
What makes me mad about mutual funds is probably something that will never change, unless the government sees how it is hurting the middle-income investor: capital gains distributions. Think about it. Most middle-income investors cannot afford to purchase an individual stock, nor can they afford the commissions. In addition, most investors cannot spend much time researching, which is why they need to put money in mutual funds. Here is where it gets worse: Most of these middle-income investors put their money into an IRA each year, but since the government will only allow them to put a measly $2,000 away, they decide to put money into a regular, taxable mutual fund. The travesty begins when they must pay income taxes on their gains. But wait! They did not sell their shares, so why should they pay income taxes? Scott Geiger
Adding insult of injury, Scott, is when you have to pay taxes on funds that
money during the year but still carried a big distribution. Ouch. Reason enough to take a look at a fund's turnover (a measure of how often a manager trades) and to check on when a fund is making its distribution before you invest.
Brenda, you hit on quite a few of my pet peeves. I would add the following: Joseph Reeves
- Most funds don't pay much attention to taxes and a lot are rather squirmy with tax distribution info. I have called asking for information and they tell me they don't have it yet, and then I tell them I am considering moving money in (I am an adviser) and all of a sudden they have the info.
The promotion and focus on short-term performance and
Morningstar ratings is stressed. Then, when things get rough, we hear that investing is a long-term endeavor.
Rarely do you hear managers or fund families admit their growing asset base may change the way they manage or that it is making it more difficult to continue the performance that attracted the assets in the first place.
I dislike managers who manage several funds, sometimes with different styles. Then we don't get a clear understanding of how they choose which investment goes into which fund.
How in the world did trading costs or commissions not get included in fund expense ratios?
Joseph, great points, especially No. 5. But even figuring out what
included in the expense ratios is no easy task. There is little that is more confusing than the rules governing this upside-down industry. The norm is that the worse you perform, the more you charge. And with a jargon-packed alphabet soup of share classes, it's hard to know exactly what you wind up paying.
Plus, even if you avoid loads and high ratios, you can get hit with a charge
you sell. Finding the price tag of your mutual fund isn't impossible, though -- for a quick primer on the basics, check out my step-by-step
guide in the
Do What I Say, Not What I Do
I do find it ironic that I'm told to invest in funds for the long term and the next thing I know, the fund manager is selling every stock in the portfolio because of some market blip. If I'm investing for the long term, why aren't they? Why encourage the panic? Don Learned
Invest in What You Know
What makes me mad is how long it takes to actually find out what stocks my fund owns. About the time they make this information available, everything has changed. Kathlyn Hoekstra
Not Getting Older, Just Better
"The number we should care about most is our manager's returns, not his or her birthdate." Yes, but I mean ... oh, come on, Brenda. When flying on an airliner, wouldn't you feel better having a pilot with plenty of hours flying in bad weather (including maybe even one skid off the runway in a nor'easter) at the controls, rather than a young turk with a perfect flying record in his or her first year? Age isn't everything, but neither are results. Nothing is everything, but everything means something. J.T. Boss
Quite true, J.T., yet as this last downturn showed us, younger managers performed just as well as older ones.
But while we're on the airplane analogy, let me add this point: I always feel more comfortable flying because the pilot is
the plane. If it goes down, so does he or she. Which is why I always want to know if my mutual fund manager invests in his own fund. Unfortunately, that information doesn't have to be disclosed. Earlier this year,
did a fund company
survey that included a question about which fund families allow managers to trade in their personal accounts. Very interesting.
Follow the Leader
I have heard from many people not to buy last year's hot fund this year. I know I shouldn't have, but I did and really got burned. Maybe it wasn't the fund specifically that died a hard death but the industry: precious metals. I bought the old Midas-Excel fund when it was No. 1. I paid dearly and will pay a little more attention to some of the important things, like who the fund manager is, and more importantly, does he or she like the Dallas Cowboys? Larry Letzer
Ah, now we're getting down to the nitty-gritty. Trouble is, you got the team wrong. You meant
Brenda Buttner's column, Under the Hood, appears every Thursday. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds.